CIA 3011

INTERNAL AUDITING
CORPORATE GOVERNANCE
OVERVIEW
 Definition  Malaysian Code of
 Nature Corporate Governance
 Theories
 Definition
 Focus
 Elements  Principles and Best
 Cadbury Report 1992 Practices
 Corporate Governance  Part I
in Malaysia  Part II
 MICG established in
1998
DEFINITION
 Deals with the way in which suppliers of finance to
corporations assure themselves of getting a return on
their investment
 A field of economics that investigates how
corporations can be made more efficient by the use
of institutional structures such as contracts,
organisational designs and legislations
 Promoting corporate fairness, transparency and
accountability
BACKGROUND
 Mar 1999 Report on Corporate Governance
 Aug 1999 KLSE LR on Audit Committee
 Mar 2000 MCCG developed by JKP1
 Jan 2001 KLSE Revamped LR
 Feb 2001 Int. Ctrl. Guidance
 Oct 2007 MCCG (revised code)
 Jan 2008 Key amendments to Bursa
Malaysia’s LR & MESDAQ Market
LR
Responsibility for CG
 Board is collectively responsible
 Board is reliant on management, board
committees, internal and external audit
NATURE
 Relates to issues arising from the following
transactions
Shareholders Board of Directors

Senior Management Other stakeholders

THEORIES
 Stewardship
 The directors to whom responsibility and
authority is delegated, are just and honest and will
act for the good of the shareholders
 Agency
 The directors as agents of the shareholders, will
act in their own self-interest requiring checks and
balances to counteract potential abuses of power
ELEMENTS
 Good Governance Framework should ensure
 Protection of basic shareholders rights
 Equitable treatment of all shareholders
 Transparency and Disclosure
 Independence, Responsibility & Accountability
of the Board
CG IN MALAYSIA
 State of Corporate Governance
- MICG’s mandate was to raise the awareness &
practice of CG in Malaysia.
 Inherent Conflicts
 Conflict of Roles
 Function of Government (Regulator vs. Controlling Shareholder)
 Conflict of Objectives in the Long Term
 Maximise shareholder value vs. socio-economic obligation
 Conflict of Tactics in the Short Term
 Populist Politics vs. Tough Economics
MALAYSIAN CODE OF CG
 Sets out the principles and best practices on
structures and processes for public limited
companies to achieve good governance
 Mainly a private sector initiative in reviewing and
establishing reforms of CG Standard
 Definition
 “The process and structure used to direct and manage the
business and affairs of the company towards enhancing
business prosperity and corporate accountability with the
ultimate objective of realising long term shareholder
value, whilst taking into account the interests of
stakeholders”
Focus
 Build structure and rules to govern the Board
of Directors
 Create an independent audit committee
 Ensure disclosure of all relevant and material
information to shareholders and creditors
 Control the management
Principles and Best Practices
 Part I
 Sets out broad principles of good governance in Malaysia
 PLCs to disclose, under listing rules, annually, a narrative account
how they applied the principles to their structure and processes
 Part II
 Sets out best practices for PLCs to follows
 PLCs to explain under listing rules, circumstances justifying
departure from such best practices
 Part III
 Exhortation to other participants
 Part IV
 Explanatory Notes and ‘mere best practices’
PART I
 Sets out broad principles of good corporate
governance
 A - Directors
 B - Director’s Remuneration
 C - Shareholders
 D - Accountability & Audit
PART II
 Details best practices for companies
 AA – Directors
 BB – Accountability & Audit
 CC - Shareholders
Principles and Best Practices
 DIRECTORS (A)
 The Board
 Every listed company should be headed by an
effective Board whom should lead and control the
company
 Board Balance
 The Board should include a balance of executive
directors and non-executive directors (including
independent non-executives) such that no individual
or small group of individuals can dominate the
Board’s decision making
Principles and Best Practices
 DIRECTORS (A)
 Supply of Information
 The Board should be supplied in a timely fashion with
information in a form and of a quality appropriate to enable it to
discharge its duties
 Appointments to the Board
 There should be a formal and transparent procedure for the
appointment of new directors to the Board
 Re-election
 All directors should be required to submit themselves for re-
election at regular intervals and at least every three years
Principles and Best Practices
 Principle Responsibilities of the Board (AA)
 To review and adopt a strategic plan for the company
 To ensure the business is being properly managed
 To identify principal risks and to ensure it is properly
managed
 To develop and implement an investor relations program
& shareholder communications policy for the company
 To review the adequacy and integrity of the company’s
internal control system including compliance with laws,
regulations, rules directives and guidelines
Principles and Best Practices
 Director’s Remuneration (B)
 The Level of Make-up of Remuneration
 Level of remuneration should be sufficient to attract and retain the
directors needed to run the company successfully. Remuneration should
be structured so as to link rewards to corporate and individual
performance, in the case of non-executive directors, the level of
remuneration should reflect the experience and level of responsibilities
undertaken by the particular non-executive concerned
 Procedure
 Companies should establish a formal and transparent procedure fro
developing policy on executive remuneration packages of individual
directors
 Disclosure
 The company’s annual report should contain details of the remuneration
of each director
Principles and Best Practices
 SHAREHOLDERS (C & CC)
 Dialogue between Companies and Investors
 Companies and institutional shareholders should each
be ready, where practicable, to enter into a dialogue
based on the mutual understanding of objective
 The AGM
 The companies should use the AGM to communicate
with private investors and encourage their
participation
Principles and Best Practices
 Accountability and Audit (D & BB)
 Financial Reporting
 The Board should present a balanced and understandable
assessment of the company’s position and prospects
 Internal Control
 The Board should maintain a sound system of internal control to
safeguard shareholder's investment and the company’s assets
 Relationship with Auditors
 The Board should establish a formal and transparent
arrangement for maintaining an appropriate relationship with the
company’s auditor’s
PRACTICAL ISSUES
 Board Effectiveness
 Statement on Internal Control
 Compliance Statement
 Principle Statement
 Director’s Remuneration
Board Effectiveness
 Individual Director
 Know the company
 Devote the time necessary to do the job
 Act in the interest of the company
 Director’s Training
 Take independent professional advice, if
necessary
Board Effectiveness
 Board of Directors
 Board Appointment
 Separating of Board and Management activities
 Strategy and Planning
 Strengthening the Board’s activities
 Independent Directors
 Use of Board Committees
Independent Directors
 Independent Non-Exec Directors is 1/3 of the Board
 Role
 Providing outside view
 Boosting the company’s status
 Provide entrepreneurial flair
 Improving the Board process
 Helping to maintain an ethical climate
 Providing specialist knowledge
 Identifying alliances or new networks
 Controlling the Chairman / CEO
 Communicating with outside parties
Independent Directors
 Who are they?
 Definition under Chapter 1 of KLSE LR
 A director who is independent of management and
free from any business or other relationship which
could interfere with the exercise on the independent
judgment or the ability to act in the company’s best
interest
Who cannot be Independent Director?
 An officer of the PLC or related company within the last 2
years
 Major shareholder (>5% voting shares)
 Relative
 Nominee or representative of any exec director or major
shareholder
 Professional adviser to the PLC or related company whether
personally or through the company of which he is a partner,
director or major shareholder
 Has engaged within the last 2 years with the PLC or related
company transaction >25k (bona fide transaction in the
ordinary course of business may be caught)
BOARD COMMITTEES
 Audit Committee (BB)
 Composition
 Functions
 What’s required of the Board
 New changes to be incorporated in the Audit
Committee chapter
 Audit Committee Report
 Report to KLSE – matter acted upon
BOARD COMMITTEES
 Audit Committee
 Responsibilities and Duties
 Review external and internal audit scope and plan
 Review external and internal audit report including restrictions of
the scope of audit
 Nomination, appointment, resignation and performance of external
auditors
 Review internal control framework and information systems
 Review investigation reports
 Quarterly results and year end financial statement prior to approval
by the Board
 Related party transaction and conflict of interest situation
INTERNAL AUDIT FUNCTION
 TRADITIONAL  WORLD CLASS
 Detection  Prevention / Risk
 Policeman  Business Partner
 Audit Focus  Business Focus
 Cost Focus  Costumer Focus
 Functional Focus  Process Focus
 Career Auditors  Career Development
 Hierarchical  Horizontal
 Green Pen  Harness Technology
 Fragmented Approach  Integrated Approach
Benefits Risk-Based Internal Audit
 Audit Committee/Board
 Identification and rating of strategic and
significant risks to the organisation
 Independent Assurance
 Eyes and ears of the Board
 Assist to meet governance requirement
 Increased accountability in internal audit
Benefits Risk-Based Internal Audit
 Management
 Independent ‘counsel’ on processes, risk and
control
 Framework for reasonably addressing risk
 Access to comparative practice information
IMPLICATION
 Annual report to include statement on corp. governance
practices
 Principles Statement (Para 15.26(a))
 Compliance Statement (Para 15.26(b))
 Specifically on internal control, Board's statement on internal
control should provide meaningful high-level governance
disclosure
 Holistic and structured risk management framework
 Role on Internal Audit
 Objective assurance and advice to Board
 Effectiveness of Internal Control and Risk Mgmt. Processes
CODE COMPLIANCE
 Voluntary BUT KLSE Revamped LR requires
several mandatory disclosures in the annual report of
PLCs
 Para 15.26 – Effective 1/7/2001
 Statement on how Principles in Part I of the Code have been
applied
 Statement on extent of compliance with Best Practices in Part II
– specifically identify & give reasons for any areas of non-
compliance with Part II & the alternatives to the Best Practices
adopted by the listed issuer, if any.
 Para 15.27 – Effective 1/1/2002
 Statement on the state of internal control
NON COMPLIANCE
 Constitutes of:
 Failure to make disclosure
 Making false or misleading disclosure
 Action
 Company or Director or Both
 Fine & Imprisonment (Max RM3m & 10 yrs imprisonment)
 Public or private reprimands
 Suspend trading
 De-list the company
 Etc
IMPACT OF CG DISCLOSURES
 Significantly heightened corp. disclosures and
accountability
 Lessened degree of risk of corporate failure
 Appreciation by Directors that they are
corporate failures
 Enhancement of operational efficiency and
effectiveness